Canadian dollar lower following strong gains amid improved chances of rate hike

TORONTO -- The Canadian dollar erased early gains to move lower late morning Wednesday amid higher commodity prices and positive economic data from Europe.

The loonie was down 0.07 of a cent to 98.08 cents US.

Eurozone area industrial production increased 0.4 per cent in April compared with the previous month. Economists had expected no increase. It was the third consecutive monthly increase in industrial production.

The Canadian currency has rallied in recent days and is up about 1 1/2 cents US since the beginning of June.

For one thing, Scotia Capital noted that expectations for an interest rate hike by the Bank of Canada have risen.

"The Overnight Index Swap market (is) now pricing in a 32 per cent chance of a hike in the next 12-months," said Scotiabank's chief currency strategist Camilla Sutton.

"These expectations have been shifting higher as expectations for the Fed to begin stepping out of (quantitative easing) have risen."

Markets have been volatile over the past couple of weeks after Fed Chairman Ben Bernanke said the U.S. central bank might pull back on its bond buying program if economic data, especially hiring, improved significantly. Other Fed officials have spoken about a winding down of asset purchases sooner.

Sutton also observed that recent Canadian economic news has been encouraging, including a much better than expected May employment report and housing starts.

Oil prices have also been supportive as the spread between Western Canadian select and West Texas Intermediate oil has fallen to a nine-month low of $11.

Commodity prices advanced Wednesday with the July crude contract on the New York Mercantile Exchange up 85 cents to US$96.23 a barrel.

July copper rose two cents to US$3.22 a pound after worries about Chinese growth helped send the metal down 17 cents over the past four sessions. Uncertainty about China's recovery has weighed on markets following weekend data showing exports, retail sales and other indicators weaker than expected.

August bullion rose $13.60 to US$1,390.60 an ounce.